Observations focused on the problems of an underdeveloped country, Venezuela, with some serendipity about the world (orchids, techs, science, investments, politics) at large. A famous Venezuelan, Juan Pablo Perez Alfonzo, referred to oil as the devil's excrement. For countries, easy wealth appears indeed to be the sure path to failure. Venezuela might be a clear example of that.

Archive for February 13th, 2008

After the Government’s loss in December’s referendum, German born Sociologist Heinz Dieterich wrote an essay, which was very critical of how Chavismo was handling things. What was most remarkable about it was that Dieterich, supposedly the intellectual creator of Chavez’ XXIst. Century Socialism seemed to be speaking with the same words the Venezuelan opposition does.

Today, Dieterich’s latest piece reaches me and I find it remarkable how lucid it is, given that it is not an economist talking, but an educated sociologist, who seems to understand how the world works better than any of the men Chavez has put in the Ministry of finance or the Ministry of Planning in the last nine years. (There was one woman, but she was a leftover from Caldera’s time and she was quite knowledgeable).

Unfortunately, Dieterich’s solution to “saving” the revolution is as bad and absurd as the actions and the policies he criticizes Chavez for: He wants more stop gap policies and wasteful solutions so that Chavez can win the election and have the people pay the price later in the form of more shortages, distortions and inflation.

The truth is that Chavez failed to use his popularity to attempt to fix the problems creating too many new ones as I have detailed before in this blog. Dieterich is quite clear in his Draconian criticism of Chavez, his policies, his Government and the people that surround him. In fact, he is so critical, that he runs the risk of being accused of being an agent for the Empire.

I have not found a copy of the document on the Internet, I am sure it will show up soon, Tal Cual published a copy today, but it is by subscription only. Here are the highlights:

The revolution on its path to suicide by Hans Dieterich

1.Chavez has yet to assume the lesson from December 2nd.

Chavez’ defeat on December 2nd. 2007 was not a small misstep, as the President seems to think, but a qualitative change in the correlation of forces.That is why it is hard to understand why the President continues to apply a discursive-political-economic model, which failed on December 2nd.

The pre-December continuism is evident: there has not been a serious debate about the defeat: the critics and self-criticism of Government officials have been rhetorical; the dominant fraction of the New Political Class has been strengthened: the naming of improvised Ministers for the important Cabinet position continues and the behavioral structure continues to be alive. In two fronts of continuism, economic policy and the discourse, are the real dangers to his own future.

2. How the Government functions.

In this section Dieterich talks about recent announcements by the Government, which generate inflation, but then blames the private sector for it.

3. Incongruous economic discourse by the Government

The Governments economic discourse is superficial and it does not take advantage of its control of state media to give the population a real economic conscience of the situation. With frequency it is mostly rhetoric or mystification (of the problems)

Or can any economist find any sense in the following statement by the Minister of Planning that “the inflation we are having is the product of inertia. Inertial effects tend to stabilize in the medium term”. This is misinforming people, because all economists know that the peak in inflation was generated by bonuses, massive outflows of additional monetary liquidity, motivated mainly by the referendum and the easy credit given to the banking system.

What seriousness in terms of information can one give to the Minister of Feeding when he says that “it is not a secret that foodstuffs like rice, wheat and corn are going to enter critical shortages due to worldwide shortages due to the insistence by the empire of using them as bio fuels.” The reality is that in 2007 barely 1.25% of the productive land of the world is being used for bio fuels and the main factor in the price increases is the large growth of China, India and Russia and the economic recovery of Latin America:

The President also generates illusions when he says when increasing the price of milk. “I hope producers respond, instead of making cheese or taking it to Colombia, which I consider to be treason, a s that milk is for Venezuelans” In a chrematistic economic, and Venezuela is a chrematistic economy of markets, economic activity is founded on the basis of profit and interest, not based on value judgments such as fatherland or treason: until Chavez introduces structures of value in the economy, complaints about patriotism are worthless.

And the President generates an illusion when he says that he will expropriate the great food and medicine production networks. If today he is not capable of guaranteeing chicken and milk in the markets, with what state logistic will he substitute the function of those same networks? Why threaten, Sun Tzu used to say, if you cannot fulfill your threats?

4. Inflation and shortages in the light of economic science

(After describing the economic variables and relation between goods and money, Dieterich then describes how inflation and its counterpart deflation originate as disequilibrium between money and supply of goods and then):

The main causes of inflation are four: 1) Increase in the price of imports. 2) Economic boycott. 3) A natural catastrophe and 4) A disproportionate increase in monetary liquidity. The first two factors are the main argument in the Government’s discourse, the third does not apply in Venezuela and the fourth is the fundamental factor in Venezuela’s inflation. (You’ve read that here before, no?)

The shortages in merchandise in a chrematistic economy occurs when the sale price (profit margin) are not attractive for the producer or seller (capitalist). This is the case of Venezuela. Many of the prices fixed by the State which affect 400 items are so low that the offer of products disappears, either because they stop producing or because they sell in markets with higher prices, such as Colombia or black markets.

5. Economic policy and the political future of Hugo Chavez

When inflation reached 17% in 2006, the Government established an official inflation target of 12%. That target was not reached. According to the Central Bank, the CPI was 22.55. However, if you take into account that many of the basic goods have frozen prices, it is realistic to assume that real inflation was around 28%. Such a high rate has two negative consequences: It destroys both the economy as well as the Government responsible for it.

One has to mention, of course, black markets and hoarding for speculative purposes as negative factors for the Government’s policies. This, however, with two considerations: a) its causes are more economic than political, resulting from the distortion of relative market prices and b) the only way to end with these are economic mechanisms, not police or political ones.

6. Electoral Year 2008: How to avoid an economic-political crisis?

The massive injection of money in the economy in electoral times for any Government and even in some cases, price controls and basic services is quite normal. This recipe was possible for electoral year 2006 and electoral year 2007, but in this manner, it’s dysfunctional and unsustainable for electoral year 2008.

To control inflation and end shortages, the President only has two options: a) Reduce excess liquidity via fiscal policies (higher taxes) monetary (interest rates) or redistribution. b) Assume as the State the cost of inflation. Option (a) will not be applied in an election year. Option (b) requires that you resolve the cost-benefit relatio
nship to small and medium size producers via realistic prices with guarantees or subsidies. It is a rentist model such as those of small farmers in the European Union or the US, but guarantees the political loyalty of those social classes and will allow time to look for a way out of the economic straight jacket self imposed by price controls.

Combined with that you need a massive program of imports in which the State will assume all of the expenses that exceed desired prices. Even if the price of oil oscillates between $65 and $80 the Venezuelan state will have sufficient capacity (I disagree with this). There is probably no time to create the logistics before the November 2008 elections, which means you have to use existing infrastructure. Only the church, the schools and the military have the presence in all corners of the country:

This is the only remaining path left to the President to avoid a crisis in 2008: To find the required inputs the President will have to get rid of the courtesan feuds of the New Political Class that surround him. If he can’t or does not want to take that step, in December 2008 he will repeat at a much larger scale what he had to love on December 2nd. 2007.

7. The ethics of truth and the President’s dilemma

One of the most worrisome political phenomena in the Venezuelan process is the growing emptiness of the ethical discourse of the Government. Instead of explaining scientifically (!) reality to the citizens, they are treated discursively with the same manipulative techniques used by bourgeois Governments. With that procedure you don’t create revolutionary conscience but clientele.

To the atrophy to the discursive veracity you have to add the progressive exhaustion of the two strategic discourses of the President: Bolivarianism and XXIst. Century Socialism. The first, because it does not offer new horizons internally in the country and the second, because the President has not created even one single economic institution qualitatively different from market economies, that is, post-capitalist.

The President faces the following dilemma: either he breaks with the pre-December status quo or continuism will end up being the end of the Bolivarian revolution.